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Report of the 16th Finance Commission for 2026-31

21 May 2026 Source

Exam Summary

The article details the key recommendations of the 16th Finance Commission (Chair: Dr. Arvind Panagariya), whose report was tabled in Parliament on February 1, 2026, for the period 2026-27 to 2030-31. The Commission recommended maintaining the states' share in the divisible pool of central taxes at 41%. Significant changes were made to the criteria for devolution, introducing 'Contribution to GDP' and redefining 'Income Distance', 'Demographic Performance', and 'Forest' parameters, while discontinuing 'Tax and Fiscal Efforts'. The report also recommended grants-in-aid worth Rs 9.47 lakh crore for local bodies (rural and urban) and disaster management, discontinuing revenue deficit, sector-specific, and state-specific grants. It outlined a fiscal roadmap, including targets for central and state fiscal deficits (3.5% of GDP for Centre by 2030-31, 3% of GSDP for states) and a strict discontinuation of off-budget borrowings. Further recommendations covered power-sector reforms (DISCOM privatization), subsidy rationalization, and Public Sector Enterprise reforms (review, closure, and disinvestment of inactive/underperforming SPSEs).

GS Paper 2: Polity and Governance (Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure; Devolution of powers and finances up to local levels and challenges therein; Finance Commission – its role, functions, and recommendations). GS Paper 3: Economy (Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Government Budgeting; Fiscal Policy, Fiscal Federalism; Infrastructure: Energy (Power sector reforms); Investment models (Disinvestment, PSE reforms); Disaster Management).

Exam Themes

Fiscal Federalism Centre State Financial Relations Local Governance And Decentralization Public Finance And Budgeting Economic Reforms (Fiscal, Power, Pse) Disaster Management Environment & Ecology Finance Commission's Role And Recommendations Tax Devolution Formula And Criteria (15th Vs 16th Fc Comparison) Grants In Aid To Local Bodies (Rural, Urban) Disaster Management Funds (Sdrf, Sdmf) Fiscal Consolidation And Debt Management Off Budget Borrowings Power Sector Reforms (Disco Ms Privatization) Subsidy Rationalization And Targeting Public Sector Enterprise (Pse) Reforms And Disinvestment State Finance Commissions Gsdp, Tfr, Income Distance Definitions

Prelims Takeaways

  • The 16th Finance Commission is a Constitutional body constituted by the President every five years.
  • Dr. Arvind Panagariya is the Chair of the 16th Finance Commission.
  • The 16th FC report covers the five-year period from 2026-27 to 2030-31.
  • The recommended share of states in the divisible pool of central taxes is 41%, same as the 15th FC.
  • The 'divisible pool' excludes cost of collection, cesses, and surcharges.
  • The 16th FC introduced 'Contribution to GDP' (10% weight) as a new criterion for devolution.
  • The 'Tax and Fiscal Efforts' criterion was discontinued by the 16th FC.
  • Criteria like 'Income Distance', 'Population (2011)', 'Demographic Performance', 'Area', and 'Forest' were retained but with modified weights or definitions.
  • The 16th FC redefined 'Income Distance' based on per capita GSDP difference from top three large states.
  • The 16th FC redefined 'Demographic Performance' based on population growth between 1971 and 2011.
  • The 16th FC's 'Forest' criterion includes open forests and considers increase in forest area.
  • The 16th FC recommended total grants worth Rs 9.47 lakh crore.
  • The 16th FC discontinued revenue deficit grants, sector-specific grants, and state-specific grants.
  • Local body grants are divided into basic (80%) and performance-based (20%) components.
  • Basic grants for local bodies are 50% untied and 50% tied to sanitation/solid waste/water management.
  • Special Infrastructure Grants are tied to wastewater management in specific cities.
  • Urbanisation Premium Grants are one-time for merger of peri-urban villages and Rural to Urban Transition Policy.
  • Entry-level criteria for local body grants include constitution of local bodies, public accounts, and timely State Finance Commission constitution.
  • Disaster management grants cost-sharing 90:10 for North-Eastern and Himalayan states, 75:25 for all other states.
  • The 16th FC recommended the Centre's fiscal deficit to be 3.5% of GDP by 2030-31.
  • The annual fiscal deficit limit for states is recommended at 3% of GSDP.
  • The Commission recommended strictly discontinuing off-budget borrowings for states.
  • It recommended active pursuit of privatization of electricity distribution companies (DISCOMs).
  • It recommended reviewing and rationalizing subsidy expenditure, setting clear exclusion criteria, and discontinuing off-budget financing of subsidies.
  • It recommended reviewing and closing 308 inactive State Public Sector Enterprises (SPSEs) and formulating a state-level PSE disinvestment policy.

Elimination Traps

  • Confusing the specific weights assigned to devolution criteria by the 15th FC versus the 16th FC (e.g., Income Distance, Population, Area).
  • Misremembering the exact percentage of states' share in the divisible pool (41%).
  • Forgetting which specific grants (revenue deficit, sector-specific, state-specific) were discontinued by the 16th FC.
  • Mixing up the cost-sharing ratios for disaster management grants (9010 vs. 75:25).
  • The nuanced definitions of 'Income Distance', 'Demographic Performance', and 'Forest' criteria as redefined by the 16th FC.
  • The specific fiscal deficit targets for the Centre (3.5% of GDP) and States (3% of GSDP) and the target year (2030-31).
  • The distinction between basic, performance, special infrastructure, and urbanization premium grants for local bodies.

Static Concepts

  • Constitutional body (Finance Commission, Article 280)
  • Centre-State fiscal relations
  • Divisible pool of central taxes
  • Grants-in-aid (Article 275)
  • Fiscal deficit
  • Gross State Domestic Product (GSDP)
  • Total Fertility Rate (TFR)
  • Off-budget borrowings
  • Public Sector Enterprises (PSEs)
  • Fiscal consolidation
  • Decentralization (Local bodies)
  • Disaster Management Act
  • State Finance Commission (Article 243I, 243Y)

Probable Question Areas

Question areas
  • Prelims
Question areas
  • 1. Which of the following statements about the 16th Finance Commission is/are correct? (Chair, period, state share, new/discontinued criteria).
Question areas
  • 2. Consider the following criteria for devolution of central taxes. Which of them were introduced/modified by the 16th Finance Commission?
Question areas
  • 3. With reference to grants-in-aid recommended by the 16th Finance Commission, which of the following grants have been discontinued?
Question areas
  • 4. What is the recommended fiscal deficit target for the Union government by 2030-31 as per the 16th Finance Commission?
Question areas
  • 5. What is the cost-sharing pattern for disaster management grants for non-Himalayan states as recommended by the 16th Finance Commission?
Question areas
  • Mains
Question areas
  • 1. "The 16th Finance Commission's recommendations reflect a nuanced approach to fiscal federalism, balancing equity with performance." Discuss, critically analyzing the changes in devolution criteria and grants-in-aid. (GS-II, GS-III)
Question areas
  • 2. Examine the key recommendations of the 16th Finance Commission regarding fiscal consolidation and public sector reforms. How do these recommendations aim to improve the financial health of the Centre and States? (GS-III)
Question areas
  • 3. Compare and contrast the devolution criteria adopted by the 15th and 16th Finance Commissions. What are the implications of these changes for different states? (GS-II)
Question areas
  • 4. Discuss the significance of grants-in-aid for local bodies as recommended by the 16th Finance Commission. What are the challenges in their effective utilization? (GS-II)
Question areas
  • 5. In what ways does the 16th Finance Commission address the issues of off-budget borrowings and subsidy rationalization? What are the potential benefits and challenges of implementing these recommendations? (GS-III)
Conceptual Recurrence

Related Prelims PYQs

Ranked by topic match, theme match, recency, and recurring UPSC patterns.

UPSC Prelims 2025 Economy

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct?

I. It has recommended grants of ₹4,800 crores from the year 2022–23 to the year 2025–26 for incentivizing States to enhance educational outcomes.
II. 45% of the net proceeds of Union taxes are to be shared with States.
III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.
IV. It reintroduced tax effort criteria to reward fiscal performance.

Select the correct answer using the code given below.

  1. A. I, II and III
  2. B. I, II and IV
  3. C. I, III and IV
  4. D. II, III and IV
Explanation
Correct answer
C. I, III and IV

The 15th Finance Commission made recommendations to promote better fiscal discipline, education, and agriculture reforms, while adjusting tax devolution among states. ✅ Statement I: Correct 4,800 crores were recommended (2022–23 to 2025–26) to incentivize states for improving educational outcomes. ❌ Statement II: Incorrect The Commission recommended 41% of Union taxes to be shared with states, not 45%. ✅ Statement III: Correct It proposed a ₹45,000 crore performance-based incentive for states to implement agricultural reforms. ✅ Statement IV: Correct It reintroduced the 'tax effort' criterion, rewarding states that better mobilize revenue in relation to their GSDP.

Indian Economy Indian Polity & Governance Public Finance & Taxation Federal Structure & Centre State Relations Constitutional & Statutory Bodies
UPSC Prelims 2023 Economy

Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts

For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

  1. A. Only two
  2. B. Only three
  3. C. Only four
  4. D. All five
Explanation
Correct answer
B. Only three

Based on principles of need, equity and performance, overall devolution formula is as given in the chart:

Indian Economy Indian Polity & Governance Public Finance & Taxation Constitutional & Statutory Bodies Federal Structure & Centre State Relations
UPSC Prelims 2015 Indian Polity

With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
1. It has increased the share of States in the central divisible pool from 32 per cent to 42 per cent
2. It has made recommendations concerning sector-specific grants

  1. A. 1 only
  2. B. 2 only
  3. C. Both 1 and 2
  4. D. Neither 1 nor 2
Explanation
Correct answer
A. 1 only

Statement 1 is Correct: The Fourteenth Finance Commission indeed increased the devolution of tax revenue from the central government to the states. Statement 2 is Incorrect: While promoting formula-based devolution, the commission does not provide recommendations regarding sector-specific grants to ensure focus on critical areas.

Indian Polity & Governance Constitutional & Statutory Bodies Federal Structure & Centre State Relations
UPSC Prelims 2018 Economy

Consider the following statements

1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

  1. A. 1 only
  2. B. 2 and 3 only
  3. C. 1 and 3 only
  4. D. 1, 2 and 3
Explanation
Correct answer
C. 1 and 3 only

Statement 1 is correct. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report indeed recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, with 40% for the Central Government and 20% for the State Governments. This recommendation aimed to ensure fiscal discipline and sustainability. Statement 2 is not correct. The Central Government has domestic liabilities of 46.1% of GDP (2016-17) and as a percentage of GDP, States liabilities increased to 23.2 per cent at end-March 2016. Statement 3 is correct. The Constitution of India empowers State Governments to borrow only from domestic sources (Article 293(1)). Further, as long as a State has outstanding borrowings from the Central Government, it is required to obtain the Central Government's prior approval before incurring debt (Article 293 (3)).

Indian Economy Indian Polity & Governance Fiscal Policy & Public Debt Federal Structure & Centre State Relations
UPSC Prelims 2019 Environment & Ecology

Consider the following statements :
1. Under the Ramsar Convention, it is mandatory on the part of the Government of India to protect and conserve all the wetlands in the territory of India.
2. The Wetlands (Conservation and Management) Rules, 2010 were framed by the Government of India based on the recommendations of Ramsar Convention.
3. The Wetlands (Conservation and Management) Rules, 2010 also encompass the drainage area or catchment regions of the wetlands as determined by the authority.

Which of the statements given above is/are correct?

  1. A. 1 and 2 only
  2. B. 2 and 3 only
  3. C. 3 only
  4. D. 1, 2 and 3
Explanation
Correct answer
C. 3 only

Statement 1 is incorrect. While the Ramsar Convention encourages member countries to take action for wetland conservation and wise use, there's no legal mandate to protect all wetlands. Statement 2 is incorrect. The Wetlands (Conservation and Management) Rules, 2010 were formulated by the Indian government to regulate activities in wetlands, and their development was not certainly influenced by the Ramsar Convention's principles. The rules also consider other national legislations and priorities. Statement 3 is correct. The Wetlands (Conservation and Management) Rules, 2010 do encompass the drainage area or catchment regions of the wetlands. This holistic approach recognizes the importance of the surrounding area for the overall health and functioning of the wetland ecosystem.

Environment & Ecology Biodiversity Conservation & Protected Areas Environmental Law & Policy
UPSC Prelims 2023 Geography

With reference to coal-based thermal power plants in India, consider the following statements :
1. None of them uses seawater.
2. None of them is set up in water-stressed district.
3. None of them is privately owned.

How many of the above statements are correct?

  1. A. Only one
  2. B. Only two
  3. C. All three
  4. D. None
Explanation
Correct answer
D. None

* Statement 1 is incorrect: The Mundra Thermal Power Plant employs a closed-cycle induced draft circulating cooling water system that utilises seawater. Seawater is drawn from the Gulf of Kutch through robust glass reinforced pipes of significant diameter. In addition, purified seawater from a reverse osmosis plant is utilised by various supplementary systems. * Statement 2 is incorrect:  According to recent research by WRI (World Resources Institute), 40 percent of India's thermal power plants are situated in regions experiencing significant water stress. This poses a challenge as these plants rely on water for cooling purposes. The scarcity of water is already causing disruptions in electricity generation in these areas, with 14 out of India's 20 largest thermal utilities having experienced at least one shutdown between 2013 and 2016 due to water shortages. * Statement 3 is incorrect:  India has a total of 269 Thermal Power Plants, with 138 of them being owned by the public sector and the remaining 131 owned by the private sector.

Indian Economy Environment & Ecology Environmental Law & Policy Indian Hydrography & Water Bodies
UPSC Prelims 2022 Environment & Ecology

Which one of the following has been constituted under the Environment (Protection) Act, 1986?

  1. A. Central Water Commission
  2. B. Central Ground Water Board
  3. C. Central Ground Water Authority
  4. D. National Water Development Agency
Explanation
Correct answer
C. Central Ground Water Authority

Central Ground Water Authority (CGWA) has been constituted under Section 3 (3) of the Environment (Protection) Act, 1986 to regulate and control development and management of groundwater resources in the country. Central Water Commission (CWC) - Established in 1945, the CWC is a technical organization under the Ministry of Jal Shakti. It focuses on water resource planning, development, and management in India, but its legal basis comes from other central government acts. Central Ground Water Board (CGWB) - While it works in close collaboration with the CGWA, the CGWB is a subordinate organization under the Ministry of Jal Shakti, established in 1970. It functions as the technical arm of the CGWA, providing hydrogeological data and technical expertise. National Water Development Agency (NWDA) - This autonomous agency, established in 1982 under the Ministry of Jal Shakti, operates under the Societies Registration Act, 1860. It focuses on resolving interstate water resource disputes, conducting feasibility studies for water resource development projects, and planning water transfer and linking projects.

Environment & Ecology Geography Environmental Law & Policy
UPSC Prelims 2023 Environment & Ecology

Consider the following statements : 

Statement-I : According to the United Nation's 'World Water Development Report, 2022', India extracts more than a quarter of the world's groundwater withdrawal each year. 

Statement-II :India needs to extract more than a quarter of the world's groundwater each year to satisfy the drinking water and sanitation needs of almost 18% of world's population living in its territory.

Which one of the following is correct in respect of the above statements?

  1. A. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
  2. B. Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
  3. C. Statement-I is correct but Statement-II is incorrect
  4. D. Statement-I is incorrect but Statement-II is correct
Explanation
Correct answer
C. Statement-I is correct but Statement-II is incorrect

* Statement 1 is correct. According to the United Nations World Water Development Report 2022, with an estimated 251 km3 annual withdrawal from an estimated 20 million wells and tube wells, India is the world's greatest groundwater user. This accounts for more than a quarter of the total groundwater extracted internationally. * Statement 2 is incorrect. India uses about 89% of this groundwater for irrigation. Major share of total groundwater extracted by India is utilised for irrigation purposes and not for drinking and sanitation purposes.

Agriculture Environment & Ecology Agricultural Policies & Supply Chains Environmental Law & Policy Indian Hydrography & Water Bodies
UPSC Prelims 2014 Economy

Which of the following are associated with ‘Planning’ in India?
1. The Finance Commission
2. The National Development Council
3. The Union Ministry of Rural Development
4. The Union Ministry of Urban Development
5. The Parliament

Select the correct answer using the code given below.

  1. A. 1, 2 and 5 only
  2. B. 1, 3 and 4 only
  3. C. 2 and 5 only
  4. D. 1, 2, 3, 4 and 5
Explanation
Correct answer
C. 2 and 5 only

1. Finance Commission: Deals with the distribution of tax revenue between the central government and states, not overall national planning. 2. National Development Council (NDC): This was the apex body for planning at the national level. It is used to formulate and review India's five-year plans. 3. Union Ministry of Rural Development: Implements specific development schemes related to rural areas, not national-level planning. 4. Union Ministry of Urban Development: Implements specific development schemes related to urban areas, not national-level planning. 5. Parliament: While not directly involved in day-to-day planning, the Parliament is used to approve the five-year plans formulated by the NDC. Additionally, Members of Parliament (MPs) can utilize funds allocated for their constituencies through MPLADS (Member of Parliament Local Area Development Scheme), which contributes to local-level planning.

Indian Economy Indian Polity & Governance Constitutional & Statutory Bodies Parliamentary System & Procedures
UPSC Prelims 2016 Environment & Ecology

Which of the following are the key features of ‘National Ganga River Basin Authority (NGRBA)’?
1. The river basin is the unit of planning and management.
2. It spearheads the river conservation efforts at the national level.
3. One of the Chief Ministers of the State through which the Ganga flows becomes the Chairman of NGRBA on a rotation basis.

Select the correct answer using the code given below.

  1. A. 1 and 2 only
  2. B. 2 and 3 only
  3. C. 1 and 3 only
  4. D. 1, 2 and 3
Explanation
Correct answer
A. 1 and 2 only

Statement 1 is correct. National Ganga River Basin Authority (NGRBA) is the financing, planning, implementing, monitoring, and coordinating authority for the Ganges River, functioning under the Jal Shakti Ministry. Statement 2 is correct. The mission of the organisation is to safeguard the drainage basin which feeds water into the Ganges by protecting it from pollution or overuse. In July 2014, the NGRBA has been transferred from the Ministry of Environment and Forests to the Ministry of Jal Shakti. Statement 3 is incorrect. The Prime Minister is the chair of the Authority.
Other members include the cabinet ministers of ministries that include the Ganges among their direct concerns and the chief ministers of states through which the Ganges River flows.

Environment & Ecology Indian Polity & Governance Geography Environmental Law & Policy Waste Management & Water Pollution Constitutional & Statutory Bodies